Mar 14, 2017
Debt Repayment: Bankruptcy Versus Proposals
Where an individual or business owes creditors money, but does not have the ability to repay debts on time as they become due, the debtor is facing insolvency. The business may draw on two possible options for dealing with the debt: bankruptcy or a creditor proposal.
Canadian law allows residents owing more than $1,000, and who are insolvent and in debt, to file for bankruptcy. This is a legal debt relief process filed under the Bankruptcy and Insolvency Act ("BIA").
Under the BIA Act, debtors must relinquish their assets, which will then be sold to pay off their debts. Bankrupts are permitted to earn income during their process, but if the income exceeds allowable limits set by the government, the bankrupt may be required to pay surplus income to the trustee in bankruptcy.
At the end of the bankruptcy proceeding, the debtor is released from responsibility to repay the debt (with some exceptions such as court ordered support payments, government student loans and fraud).
Filing a proposal is another debt-repayment option that businesses and consumers may use to manage outstanding debt. Proposals are also filed under the BIA.
Filing a proposal involves making an offer to creditors to reach a compromise on the amount of debt or the timing of repayment. Creditors can either accept or reject the proposal during a vote.
Unlike with bankruptcies in which debtors must give up their assets, filing a proposal allows debtors to keep their assets. The debtor is obligated to fulfill all terms of the proposal in order to be released from the debts.
There are two types of proposals:
- Commercial proposals: these are also known as Division I proposals. There is no monetary limit to the amount owed
- Consumer proposals: individual debtor may file consumer proposals if they owe less than $250,000, excluding mortgages
Individuals and businesses facing insolvency are encouraged to consult with a bankruptcy and insolvency lawyer before making a decision on debt repayment. An experienced lawyer can provide strategies to protect the debtor's interests in the most optimal manner possible.